[Federal Register Volume 65, Number 225 (Tuesday, November 21, 2000)]
[Notices]
[Pages 69977-69979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29707]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43537; File No. SR-CBOE-00-43]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to 
Participation Rights in Crossing Transactions

November 9, 2000.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 29, 2000, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE is proposing certain changes to provisions of its rule 
that governs the participation rights of firms crossing orders. The 
text of the proposed rule change is set forth below. Additions are 
italicized and deletions are bracketed.
* * * * *
Chicago Board Options Exchange, Inc., Rules, Chapter VII, Section D: 
Floor Brokers, ``Crossing'' Orders, Rule 6.74
    (a)-(c)  No change.
    (d) Notwithstanding the provisions of paragraphs (a) and (b) of 
this Rule, when a Floor Broker holds an equity option order of the 
eligible order size or greater (``original order''), the Floor Broker 
is entitled to cross a certain percentage of the order with other 
[customer] orders [from the same firm from which the original order 
originated (``originating firm] that he is holding or in the case of a 
public customer order with a facilitation order of the originating firm 
(i.e., the firm from which the original customer order originated). The 
appropriate Floor Procedure Committee may determine, on a class by 
class basis the eligible size for an order that may be transacted 
pursuant to this paragraph (d), however, the eligible order size may 
not be less than 50 contracts. In accordance with his responsibilities 
for due diligence, a Floor Broker

[[Page 69978]]

representing an order of the eligible order size or greater which he 
wishes to cross shall request bids and offer for such option series and 
make all persons in the trading crowd, including the Order Book 
Official, aware of his request.
    (i)-(vii)  No change.
* * * Interpretations and Policies:
    No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the CBOE included statements 
concerning the purpose and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    a. Background. The Commission recently approved a change to 
Exchange Rule 6.74 to provide a participation right that entitles 
member firms to cross a certain percentage of each order they send to 
the floor.\3\
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    \3\ See Securities Exchange Act Release No. 42835 (May 26, 
2000), 65 FR 35683 (June 5, 2000) (File No. SR-CBOE-99-10).
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    Specifically, the rule change provided that after the Floor Broker 
representing an order (``original order'') has requested and received a 
market from the trading crowd, if the trade takes place at that market, 
the Floor Broker is entitled to cross 20% of the contracts remaining in 
the original order with another order from the same firm from which the 
original order originated.\4\ The participation right applies only 
after all public customer orders in the book and represented in the 
crowd at the time the market was established have been satisfied.
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    \4\ The rule applies equally to a case where the second order is 
provided by the firm from its own proprietary account, in which case 
the second order is referred to as a ``facilitation order.'' See id.
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    If the trade takes place at a price between the best bid and offer 
provided by the crowd then, after public customer orders are satisfied, 
the Floor Broker will be entitled to cross 40% of the contracts 
remaining in the original order.
    b. Proposed Changes. The Exchange is proposing to make two changes 
to Rule 6.74(d). The first change would make clear that the rule 
includes the situation where a Floor Broker is seeking to cross a 
solicited order against the original customer order. The second change 
would allow the Floor Broker representing the original customer order 
to solicit the order to trade against it even if that Floor Broker is 
not a nominee of the originating firm.
    (i) Application of the rule to solicited orders. The Exchange 
states that its recently approved rule governing participation rights 
in cross trades was clearly intended to allow the member firm to 
receive its participation right when seeking to cross either a 
solicited order or a facilitation order against the original customer 
order.
    The Exchange states that this is indicted by the rule language 
itself, which refers to ``other customer orders'' that a Floor Broker 
may be seeking to cross against the original order, in addition to--and 
as distinct from--``facilitation orders.'' \5\ The Exchange states that 
there would have been no reason to distinguish between these types of 
orders if the rule was intended to allow the member firm to receive its 
participation right only when facilitating a customer order. The 
Exchange additionally points out that paragraph (d)(vi) of the rule 
specifically indicates that a Floor Broker might be holding either a 
solicited or facilitation order.\6\
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    \5\ Paragraph (d) of Rule 6.74 states that ``the Floor Broker is 
entitled to cross a certain percentage of the order with other 
customer orders from the same firm from which the original order 
originated (`originating firm') that he is holding or in the case of 
a public customer order with a facilitation order of the originating 
firm.''
    \6\ Paragraph (d)(vi) states: ``A Floor Broker who is holding a 
customer order and either a facilitation or solicited order and who 
makes a request for a market will be deemed to be representing both 
the customer order and either the facilitation order or solicited 
order, so that the customer order and the other order will also have 
priority over all other orders that were not being represented in 
the trading crowd at the time the market was established.''
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    Finally, the CBOE notes that in letter that amended the original 
proposal of Rule 6.74(d), in response to questions from the 
Commission's staff about what type of entity might be solicited to 
trade against the original order pursuant to the rule, the Exchange 
stated that the ``member firm may solicit a broker-dealer, a public 
customer, or any other source from which the firm expects to be able to 
find additional liquidity and a better price.'' \7\
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    \7\ Letter from Timothy Thompson, Director-Regulatory Affairs, 
Legal Department, CBOE, to Nancy Sanow, Division of Market 
Regulation (``Division''), the Commission, dated April 10, 2000 
(Amendment No. 2 to File No. SR-CBOE-99-10) (``amendment letter'').
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    Nonetheless, the CBOE states, a few members of the Exchange have 
questioned whether the rule was in fact intended to allow the member 
firm to receive a participation right by trading a solicited order 
against the original customer order. These members have based their 
uncertainty on the text of Rule 6.74(d), which states that ``the Floor 
Broker is entitled to cross a certain percentage of the order with 
other customer orders from the same firm from which the original order 
originated (`originating firm') that he is holding.'' (emphasis added)
    These members believe that the term ``customer'' could be read to 
mean either a public customer (i.e., a non-broker-dealer) or a client 
with which the firm has had a longstanding relationship. According to 
the Exchange, however, the aforementioned amendment letter demonstrates 
that the term ``customer'' was not intended to be read so 
restrictively. Consequently, the Exchange is now proposing to delete 
the term ``customer'' from this portion of the rule to make clear that 
the solicited order may come from any source.\8\
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    \8\ For instance, as clarified by the proposed rule change, the 
participation right would apply equally when the Floor Broker seeks 
to cross the original order with an order solicited from a market 
maker. Telephone conversation between Timothy Thompson, Director-
Regulatory Affairs, Legal Department, CBOE, and Ira L. Brandriss, 
Attorney, Division, the Commission, on September 21, 2000.
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    (ii) The Floor Broker may solicit the order. As currently written, 
the cross participation rule provides that the Floor Broker may cross 
the original customer order with other ``orders from the same firm from 
which the original order originated (originating firm).'' As such, if 
the Floor Broker who is representing the order is not a nominee of the 
originating firm but works for a firm that has been given the order to 
execute (``executing firm''), the Floor Broker or the executing firm 
would not be entitled to obtain the cross participation entitlement 
with respect to any order that the Floor Broker or executing firm had 
solicited.
    After considering the implications of this restriction, the 
Exchange has determined to amend the rule so that the Floor Broker's 
participation entitlement is not limited to orders from the originating 
firm only. The proposed rule change would permit the Floor Broker who 
is not a nominee of the originating firm to himself solicit orders, 
with the aim of expanding the pool of potential liquidity providers who 
will be able to participate in the price

[[Page 69979]]

improvement process that the Exchange believes is encouraged by this 
rule.
    To permit the Floor Broker who is not a nominee of the originating 
firm to solicit orders that will receive the benefit of the cross 
participation entitlement, the Exchange is proposing to delete the 
phrase that states that the order must be ``from the same firm from 
which the original order originated (`originating firm').''
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with and furthers the objectives of section 6(b)(5) \9\ of the Act in 
that it is designed to remove impediments to a free and open market and 
protecting investors and the public interest.
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    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the CBOE consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the principal offices of the 
CBOE. All submissions should refer to File No. SR-CBOE-00-43 and should 
be submitted by December 12, 2000.
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    \10\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-29707 Filed 11-20-00; 8:45 am]
BILLING CODE 8010-01-M